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Perkins on Real Estate

Holding a mortgage provides homeowner financial benefits

By Broderick Perkins

A lack of knowledge about mortgages may be causing many homeowners to overlook the financial benefits of holding a mortgage.

Some consumers believe it's easier to program TiVo, do their taxes and understand the opposite sex than it is to understand the home loan process, according to a Harris Interactive poll commissioned by Countrywide Home Loans, Inc.

That means many are in the dark about using their home as a financial management tool, according to findings in "Disconnect: Many Americans Consider Their Home Equity as the Largest Financial Asset, Yet They Do Not Actually Manage Their Mortgage."

The home loan lender found 91 percent of homeowners deem equity in their primary home is an important financial aspect, but few plan to use it.

Homeowners often believe they are tied to their original loan and don't bank on the equity or the ability to change loans or otherwise manage the asset.

"My parents were struggling until I refinanced them a few years ago. They were old school: 'Pay off the house and when we get old, no mortgage.' The problem was, they had no money when they needed it," said Mark K. Hicks, real estate and mortgage broker/owner of Seabrooke Financial in San Jose.

Only 60 percent of those with equity would tap it at all, the survey found.

Other sound approaches to managing equity as an asset can include:

* Obtaining a new loan to stop the upward march of interest rates on an adjustable rate mortgage--Even a slightly higher fixed rate will be more manageable than an ARM allowed to adjust to its maximum amount. If your new loan is cheaper, continue paying the old monthly amount to generate more equity faster.

* Refinancing to use some of the equity to finance capital improvements, start a new business, pay for education or other low-risk investment likely to yield a return--among those queried in the Countrywide survey who would tap their equity, 70 percent of them would likely use the money wisely, for home improvements. A home improvement is a worthwhile use of equity provided the improvement offers a return in value to the home.

"While treating home equity like a bottomless piggy-bank is certainly dangerous, owning a home and using mortgage credit wisely can provide peace of mind, build equity, help finance a college education, start a business and help provide for a secure retirement," said San Jose-based Valley Properties broker/owner Colleen Badagliacco, who is also president of the California Association of Realtors.

* Tapping equity before it's needed, say before a job loss--A lender is less likely to approve a loan for someone who is unemployed. The borrowed funds won't cost consumers until they actually use them, if they are borrowed in the form of a home equity line of credit, but those funds will be immediately available in an emergency. Likewise, tapping equity for the one-time use of consolidating debt--provided the consolidated accounts are closed and not reopened--can be a cheaper way to pay down debt.

"My husband and I had an unfortunate experience with a credit card where we had a high balance and the credit card company jumped their 'fixed' introductory rate from 5 percent to a whopping 19 percent when we missed a payment while we were on vacation," said Julie Ziemelis, a mother of two from Los Gatos.

"Our payments went from $600 a month to almost $1,100. We were able to refinance our mortgage, which also included paying off the credit card, saving us over $600 a month. It really saved us," said Ziemelis, who is also the spokeswoman for the Santa Cruz Association of Realtors.

* Using the equity from a first home to purchase a second home or another property, provided the second home is affordable or is an investment property with a positive cash flow from rent or other use or has a good rate of appreciation.

* Using the home as a retirement fund in the form of a reverse mortgage. The special mortgages require initial counseling (mandated in some states) and special attention to the details, but they allow homeowners at least 62 years of age to tap their equity as tax-free income. The loans aren't for everyone 62 and older, but for some they are worth considering, again, only with great scrutiny.

Long-term homeowners can also use their current equity as a financial cushion with or without a reverse mortgage, often by simply refinancing to a lower rate, shorter term or both.

Said Hicks, "Most consumers do not know how to use the equity position in their home, even though it is likely their largest, highly-liquid financial asset. The problem is under-education. There are many older people who are living below the poverty line with untapped equity in their properties but have no idea how to access it."

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.